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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Strategic Cost & Performance Management

Case: Kaveri Motors Ltd, Pune, makes scooters. Its current unit cost is Rs 52,000 against a market-determined selling price of Rs 55,000 and the board wants a 20% margin on selling price. The firm uses a target costing approach. What is the target cost per scooter and the cost reduction needed?

Target cost is market price less required profit. With a Rs 55,000 price and a 20% margin on selling price, target cost is Rs 44,000. Against current cost of Rs 52,000, the firm must cut Rs 8,000 per scooter to meet the target.

  1. ATarget cost Rs 44,000; reduction Rs 8,000Correct
  2. BTarget cost Rs 45,833; reduction Rs 6,167
  3. CTarget cost Rs 44,000; reduction Rs 6,167
  4. DTarget cost Rs 41,600; reduction Rs 10,400

Explanation

Target cost = selling price minus desired margin = 55,000 x (1 - 0.20) = 44,000. Cost reduction needed = 52,000 - 44,000 = 8,000. Option B wrongly treats the margin as 20% on cost (55,000/1.2 = 45,833).

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